Runaway Production: The United States of Tax Incentives

'The Hunger Games'

The competition to offer Hollywood lucrative tax rebates is fierce even as some local pols begin to question the value of givebacks

Producers looking for a location weigh many factors — screenplay, crew base, availability of stages, travel and lodging — but these days, first and foremost, they consider the local incentives and tax breaks that can reduce a production’s budget. Forty-two U.S. states and territories now offer such benefits, says Joe Chianese, who tracks incentives for payroll services firm Entertainment Partners.

But while such givebacks can be good for the bottom line, they can also be tricky: Incentives can change on a dime, often subject to the whims of a state’s political party when power changes hands.

Michigan’s once-generous incentive program, for example, came under fire when Republican Gov. Rick Snyder came into office in 2011. Snyder cut the state’s 42% refundable tax credit down to 32%, which damaged production infrastructure that had been lured to the state.

“The scaling back of the incentive drastically affected the waterfall of film activity pouring into the state,” says Hopwood DePree, owner of Michigan-based production outfit TicTock Studios. Applications for the state’s tax program fell off almost immediately. That same year, one of Michigan’s largest production houses, Raleigh Studios, which had come to the state two years prior, defaulted on its $18 million bond.

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Another critique is that incentives are open to corruption.

The industry was spooked in 2011 when Iowa’s film commissioner was charged with criminal misconduct in his handling of the state’s film tax credits. The case became a poster child for opponents of film incentives coast to coast.

“There are always individuals with ill intent,” acknowledges Chris Stelly, exec director of Louisiana Entertainment, which oversees the state’s transferable tax credit of up to 35%. “We won’t tolerate any abuse toward these programs.” He adds that Louisiana has a stringent review process in place, denies expenditures that don’t qualify and turns cases that don’t pass the sniff test over to law enforcement.

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Some cases are under investigation now, he says.

Other arguments against incentives hold that they don’t help the states that offer them. In March, the Massachusetts revenue commission issued a scathing report on the state’s tax credit program, which stated that two-thirds of the total $175 million awarded in 2011 went to out-of-state spending. “The critique is that while they appear to bring in short-term temporary activity to a state or community, a lot of those benefits flow to the production companies,” says Eileen Norcross, a senior research fellow at George Mason U. “The people who are hired locally tend to be (in) more low-wage service industry jobs. It provides a temporary economic blip on the radar, and then it’s sort of fleeting.”

Meanwhile, Chianese says Michigan’s cash rebate, while still no higher than 32%, keeps it in the game. Moreover, the fund’s $50 million annual cap has been approved through the next fiscal year, which begins Oct. 1. The biggest recent project to shoot in the state is the fourth “Transformers” movie, which is spending $80 million there, says a film office spokeswoman.

But the changing incentives make for a constant game of musical chairs. “Iron Man 3,” which had originally planned to film in Michigan, went to North Carolina instead. The state, which offers a 25% refundable tax credit, in turn lost the two final “Hunger Games” installments to Georgia, where the credit can be as high as 30% if the producers display the state logo in the credits roll. Yet, in 2102, North Carolina logged $276 million direct production spending from such productions as Showtime’s “Homeland,” according to North Carolina film office topper Aaron Syrett.

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A drawback, Syrett admits, is that the North Carolina legislature funds the program only a single year at a time. The current incentives will end on Jan. 1, 2015. Though they’ll likely be extended in next May’s legislative session, such uncertainty is anathema to studios, which won’t tolerate any instability that might upset their carefully constructed production budgets. Such uncertainty isn’t an issue in Louisiana, Stelly says. The state’s transferrable credit of up to 35% is permanent. The state continues to lure projects of all stripes, from A&E’s “Duck Dynasty” to the fifth “Pirates of the Caribbean.”

Ultimately, though, state incentive programs aren’t without controversy, and many film commissions are battling to get lawmakers to extend them. While Syrett expects a renewal, he adds that the process entails “educating” a slew of freshman legislators that the incentives create jobs. “Some people get it,” he says. “Some don’t.”

(Pictured: “The Hunger Games” franchise sparked competition among several states with incentive offers.)

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  1. RonDonJon says:

    Keep in mind that only 3 state tax incentives are viable at the moment: New Mexico, Louisiana and Georgia. Trying to take advantage of them anywhere else will lead to major problems.

    • Adam R says:

      What about Pennsylvania’s incentives? Pretty solid indeed by offering up to a 30% tax credit.

    • Louisiana almost scaled theirs back in many ways just this year. The program survived, but the heat is on in a major way. New Mexico is stable, but the rolling cap means checks could take years to come. Georgia seems fine, for now.

      Massachusetts and New York would be better subs for NM & La.

  2. scott squires says:

    ‘he adds that the process entails “educating” a slew of freshman legislators that the incentives create jobs.’

    They don’t create jobs. They’re simply move jobs. And the jobs cost the states and governments much more than if they simply employed people directly. Put those funds to use with a local ongoing industry. Reducing taxes for all businesses in the area provides much better stimulus according to economics research.

    • RonDonJon says:

      This is all well and good in theory, but actually when you start to deal with Film Financiers on a regular basis, this logic falls apart. Unless you are financing your film out-of-pocket or you are backed by a major studio, you fall into how 90% of domestic films are made through a combination of pre-sale, incentives, equity and GAAP. Most film funds will REQUIRE your production to be taking advantage of at least a 30% incentive in order to even consider you for financing.

      And when they talk of “creating jobs” it is in the context of “for the state” since a production in GA is going to primarily employ GA-based people and not fly everybody out from LA.

      • ImaDawg says:

        No studio has ever refused a free lunch because there weren’t enough zeros in the offer. If there is only $10,000 to be claimed, someone’s going to claim it. The danger to film communities is when we convince ourselves that the only way to have vibrant film centers is if we accede to a race to the bottom, as we undercut each other and reduce our collective bargaining power in an effort to attract temporary jobs.

        Aside from that, the studios are going to hire 70-80% of their department heads out of state anyway. The bulk of the local jobs created specifically by incentives are entry level and low income.

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